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CBS Q3 Earnings Surpass Estimates, Revenues Increase Y/Y

Zacks Equity Research

CBS Corporation CBS reported third-quarter 2019 adjusted earnings of 95 cents per share that beat the Zacks Consensus Estimate by 4.4% but decreased 23.4% year over year.

Revenues inched up 1% from the year-ago quarter to $3.30 billion, surpassing the consensus mark by 2.2%.

Advertising revenues (35.7% of total revenues) declined 6.8% year over year to $1.18 billion due to a lack of political advertising sales.

Content licensing & distribution revenues (28.5% of total revenues) were up 0.6% to $939 million, primarily due to higher sales of series produced for third parties.

Affiliate and subscription fees (34.1% of total revenues) rose 11.5% year over year to $1.12 billion. CBS stated that direct-to-consumer revenues from CBS All Access and Showtime OTT grew 39% year over year, driven by a strong slate of original programming. Additionally, virtual MVPD revenues grew 18%.

However, other revenues declined 6.8% year over year to $55 million.

The Walt Disney Company Price, Consensus and EPS Surprise

The Walt Disney Company Price, Consensus and EPS Surprise

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Furthermore, adjusted operating income declined 21.1% year over year to $581 million. Operating margin contracted 490 basis points (bps) to 17.6%.

Merger Details With Viacom

On Aug 13, CBS and Viacom entered into an “Agreement and Plan of Merger,” as amended as of Oct 16, 2019. Per the agreement, Viacom will merge with CBS, with the latter remaining the surviving company.

CBS expects the merger to close by early December. Upon the completion of the merger, the name of the combined company will be changed to ViacomCBS Inc.

Notably, CBS will delist its Class A and Class B common stock from the NYSE. ViacomCBS Class A and Class B common stock, which will include the outstanding shares of CBS Class A and Class B common stock (which will remain outstanding shares of ViacomCBS), will be listed on Nasdaq under the new ticker symbols “VIACA” and “VIAC,” respectively.

Segment Details

Entertainment revenues (69.4% of total revenues) increased 4.4% year over year to $2.29 billion.

This solid year-over-year upside was backed by 7% growth in content licensing and distribution revenues and 22% improvement in affiliate and subscription fee revenues, driven by higher revenues from virtual MVPDs as well as subscriber growth at CBS All Access.

However, Entertainment operating income decreased 21.4% year over year to $302 million, primarily attributed to increased investment in content and direct-to-consumer streaming services.

Cable Networks’ revenues (17.1% of total revenues) went up 6.4% to $563 million. Increased revenues from Showtime digital streaming subscription offerings and contribution from Pop fueled the top line.

However, Cable Networks operating income decreased 18.7% year over year to $196 million. Increased investments in programming, including costs associated with the premieres of new series like City On A Hill, Becoming a God in Central Florida and The Loudest Voice, negatively impacted profitability.

Publishing revenues (6.6% of total revenues) of $217 million decreased 9.6% due to lower print book sales. Bestselling titles included The Institute by Stephen King and The Book of Gutsy Women by Hillary Rodham Clinton and Chelsea Clinton.

Publishing operating income increased 2% to $52 million, primarily due to lower production costs.

Local Media revenues (12.3% of total revenues) declined 6.5% to $406 million, primarily attributed to lower political adverting sales. CBS’ carriage dispute with a distributor also hurt the top line.

Moreover, Local Media operating income fell 22.6% year over year to $96 million.

Balance Sheet & Cash Flow Details

As of Sep 30, 2019, cash and cash equivalents were $196 million compared with $216 million as of Jun 30, 2019.

Additionally, as of Sep 30, 2019, long-term debt was $9.36 billion, unchanged from Jun 30, 2019.

Operating cash flow in the quarter was $27 million compared with $124 million in the previous quarter. Free cash outflow was $7 million compared with $157 million in the prior quarter.

Zacks Rank & Stocks to Consider

CBS currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader consumer discretionary sector are BrightView BV, Charter Communications CHTR and Zynga ZNGA, all carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Long-term earnings growth rate for BrightView, Charter Communications and Zynga is pegged at 19%, 38% and 13.9%, respectively.

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